Rising Earnings Inequality Is Taking a Mounting Toll on Social Security

The following article by Rachel West and Rebecca Vallas was posted on the Center for American Progress website February 16, 2017:

For more than 80 years, the Social Security system has been at the heart of economic security for millions of American workers and their families. Of the nearly 60 million Americans who receive Social Security today, roughly 3 in 5 seniors and 8 in 10 disabled workers rely on the program’s modest benefits for most of their family income. And with the United States facing an impending retirement crisis at the same time that most American workers have seen their wages stagnate and job stability decline, Social Security will become even more vital for families in the coming years.

Rather than strengthening Social Security just as its basic benefits have become more important for families’ stability, many conservatives choose to create a false sense of urgency by focusing solely on Social Security’s modest long-term financial challenges. This allows them to promote damaging policies, such as raising the retirement age, that would shortchange American workers and undermine their economic security. In fact, the Republican plan for Social Security would raise the retirement age and institute additional across-the-board benefit cuts that would take effect as soon as January 2019.

But conservatives’ scaremongering misses the real story. Over the past several decades, a precipitous rise in income inequality—due in large part to policy choices that have concentrated ever-increasing shares of the nation’s income in the hands of those at the top of the income ladder—has taken a huge toll on Social Security’s finances. As a result of the growing share of earnings exceeding the payroll tax cap, for instance, millionaires and billionaires pay into the system for only a few weeks, days, or even hours each year, compared with the vast majority of workers, who contribute to Social Security all year long.

While many couples exchange gifts to show their love on February 14, two days later—on February 16—millionaires get a gift of their own: In 2017, February 16 is Valentine’s Day for millionaires, the day the last of the nation’s millionaires stop contributing to Social Security for the entire year. President Donald Trump stopped contributing much sooner—just 40 minutes into New Year’s Day.

This column illustrates the extent to which rising inequality has eroded Social Security’s finances, updating analysis from a 2015 Center for American Progress study. The authors calculate that if policymakers had fixed Social Security’s payroll tax to cover 90 percent of earnings since 1983—rather than allowing its coverage to fall to 83 percent today—the assets of Social Security’s combined trust funds would have been $1.3 trillion greater at the end of 2015. And if workers’ wages had grown at the same rate as their productivity since 1983, the trust funds would have an additional $559.7 billion.

How inequality hurts Social Security

For much of the past several decades, the majority of America’s working families have seen their wages stagnate despite facing rising costs for key elements of a middle-class lifestyle, such as housing, health care, and education. By contrast, those at the top have experienced tremendous economic gains fueled in part by outsized increases in earnings. From 2009 to 2015, for example, the bottom 99 percent of families captured less than half—48 percent—of total real income growth, while the top 1 percent of families captured 52 percent.

This growing inequality has not just prevented hardworking families from getting ahead, it has also increasingly threatened Social Security’s financial outlook in three main ways.

1. Stagnant wages have curbed payroll tax revenues

When workers’ average wages fall behind the productivity growth they generate, with gains from productivity instead funneled toward CEO pay and corporate profits, Social Security’s payroll tax revenues grow more slowly and thus are lower than if workers’ wages had risen. At the same time, weak wage growth and resulting economic insecurity mean Social Security’s modest benefits are more critical than ever because saving for retirement, for instance, is more difficult.

2. A growing share of earnings exceeds the payroll tax cap

As the earnings of the rich soar above those of regular Americans, a greater share of earnings escapes taxation each year, robbing Social Security of revenue it would otherwise collect. This happens because workers’ annual earnings are exempt from Social Security payroll taxes once they exceed the payroll tax cap, which is set at the first $127,200 in earnings for 2017. Due to runaway incomes at the top, the share of total earnings subject to the payroll tax has sunk from 90 percent in 1983, when Social Security underwent its last major reform, to about 83 percent today.

As a result, while the average worker contributes to Social Security all year long, millionaire and billionaire earners stop contributing to Social Security early in the year. In 2017, individuals with wage incomes of $1,000,000 stop contributing on February 16, and those with higher incomes stopped contributing even earlier. (see methodology note below)

3. Earnings below the payroll tax cap have become less equal

Although many workers struggle with economic insecurity, rising inequality has hit low-income workers the hardest. This is particularly true in the 21 states where the minimum wage has been stuck at $7.25 per hour for the past seven years. And while low-income families finally experienced gains from the economic recovery starting in 2015—especially in states that raised their statewide minimum wages—real weekly earnings for the lowest-paid 10 percent of earners fell over the preceding 35 years.

Lack of wage growth threatens low-income workers’ ability to meet their families’ basic needs. At the same time, it increases pressure on Social Security’s finances in two ways. First, Social Security receives less tax revenue than if wages for low-wage workers were rising in tandem with productivity growth. And second, Social Security’s benefits disproportionately increase when low-wage workers struggle—as they should to boost these workers’ economic security. This is because Social Security benefits replace a greater share of wages for lower-income workers than for higher-income workers once people stop working. Rising earnings inequality beneath the tax cap causes benefits to grow faster relative to payroll tax revenue than if inequality were to remain stable.

Simulating inequality’s damaging effects

Following the methods described in a 2015 CAP issue brief, the authors updated two simulations that illustrate how the assets in the combined trust funds have been affected by inequality since 1983, when Social Security last underwent major legislative reforms. These simulations address two questions. First, how much greater would the trust funds’ assets have been at the end of 2015 if the share of taxable earnings had been fixed at 90 percent of earnings? And second, how much more money would have been in the trust funds by the end of 2015 if the average worker’s wages had kept pace with productivity growth? There are not sufficient data on the wage distribution below the cap on taxable earnings to simulate what would have happened to Social Security’s finances if the distribution of wages had remained constant from 1983 to 2015—in other words, if earnings inequality had not changed. These two simulations represent conservative estimates of the effect of rising inequality on Social Security’s finances.

This analysis shows that if the maximum taxable wage base had remained fixed at 90 percent of earnings from 1983 to 2015—the last year for which there are complete data—the combined Social Security trust funds’ assets would have been $1.3 trillion greater. This amount alone would cover more than 11 percent of the expected 75-year shortfall in Social Security’s trust funds. Second, if the growth in workers’ wages had matched the growth in their productivity over the same period, the trust funds would have contained an additional $559.7 billion at the end of 2015.

Policymakers should act now to strengthen—not cut—Social Security

These two simulations illustrate how rising inequality has eroded the finances of the Social Security system, undermining a key source of financial security for American families as the nation simultaneously confronts a retirement crisis. Rather than allowing these trends to continue, causing Social Security’s fiscal challenges to deepen, policymakers should act now to bolster the program for current and future generations—as supported by large majorities of Americans across party lines.

President Trump campaigned on a promise to protect and preserve Social Security. That would be an important first step, but American workers need more. If Trump is serious about his promise to shield American families from the deep, damaging cuts proposed by his fellow conservatives—including several of his own Cabinet picks—he should at least act to reverse rising inequality and strengthen Social Security.

Methodology note

To calculate how long it takes millionaires and other high earners to finish contributing to Social Security in 2017, the authors assume that annual earnings are spread out equally throughout the year to calculate earnings per day. We further assume that each day’s earnings are accrued during a typical eight-hour work day. Dividing by the 2017 cap on taxable earnings then yields the number of days required to reach the cap.

View the original post here.